Small Business Health Insurance Credits

Churches with fewer than 25 full-time equivalent employees may benefit from providing health insurance.

Many small businesses and tax-exempt organizations, including churches, that provide health insurance coverage to their employees qualify for a special tax credit authorized by the Affordable Care Act. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.

For tax years 2014 or later, there are changes to the credit:

  • The maximum credit increases from 35 percent to 50 percent of premiums paid for small business employers and from 25 percent to 35 percent of premiums paid for small tax-exempt employers.
  • To be eligible for the credit, a small employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace or qualify for an exception to this requirement.
  • The credit is available to eligible employers for two consecutive taxable years.

The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low- and moderate-income workers. It’s generally available to employers who have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,800 per employee per year. Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many employers will qualify even if they employ more than 25 individual workers.

The maximum credit goes to smaller employers (those with 10 or fewer FTEs) paying annual average wages of $25,400 or less.

Key point. The $25,400 and $50,800 amounts are adjusted annually for inflation, and represent the 2014 amounts. They increase to $25,800 and $51,600 for 2015.

Key point. The law does not exclude religious organizations from this credit. It states that the term “tax-exempt eligible small employer” means “an eligible small employer which is any organization described in section 501(c) which is exempt from taxation under section 501(a).”

Example. If you pay $50,000 a year toward employees’ health care premiums, and if you qualify for a 15 percent credit, you save $7,500. If you saved $7,500 a year from tax year 2010 through 2013, that’s total savings of $30,000. If, in 2014, you qualified for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $10,000 a year.

The credit is refundable, so churches and other tax-exempt organizations that pay no income taxes may be eligible to receive the credit as a refund so long as it does not exceed their income tax withholding and Medicare tax liability.

Use IRS Form 8941 to calculate the credit. If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T. You must file the Form 990-T in order to claim the credit, even if you don’t ordinarily do so.

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